Friday, October 03, 2008

AND SO GOES THE STOCK MARKET

Well while we were greeted to an exciting opening that took the stock market higher, based on the Dow Jones Industrials Average (DJIA), by well over 300 points, reality set in after the House passed EESA and we closed down 157 points. For the week, the markets sustained their heaviest losses since post 9/11. DJIA down 7%, S&P500 down 9% and NASDAQ down 10%.

The climate is new, at least to many of the people entrusted to manage these days. Most of these managers weren't even born, or were quite young, in the "before times," when stocks traded at much lower valuations.

As example, since 1995, the average price:earnings ratio (PE ratio) of equities was around 25. That's stock price divided by earnings per share in case you're a novice. Now many analysts will debate, including yours truly, whether or not PEs are reasonable tools for making investment decisions and valuing stocks. Without going into all of that at this time, let me just say the following:

If you are a "believer" in the use of PE ratios for at least some reasonable portion of your investment toolbox, prior to 1995, the average PE ratio was - gulp - less than 14.

Now that's average. In either period - the really really time-tested long one (before most current analysts and money managers were even being educated as analysts and money managers) - investors paid higher PE ratios for faster growing companies and they paid less for slower growth. Sometimes much less, like 50% or more less.

There are many reasons why stocks have gone through these periods of lower and higher valuations:

1. Inflation
2. Deflation
3. Interest rates - high and low
4. Economic stagnation or contraction
5. Economic expansion
6. Invention of Individual Retirement Accounts and other new investment retirement pools
7. Mutual fund industry growth - or lack thereof

I can add to this list. But let's keep it somewhat simple for now.

With the growing threat of a major, deep and protracted recession in our midst, I would not be surprised to see professional investment folks - really really smart ones - revisit "the olden days." The "before times."

This is only a very short version of this observer's analysis. I'll take more time at a later date to go into greater detail.

However, if equities return to the level of earnings that we saw, for example, in 2002, the S&P500 Index could be well below 800 and the DJIA at or below 8,000. This could be very scary for many people. It would, or should, send all of my fellow MBAers back to the history books.

Worse than that, however, it would have an enormously negative impact on the value of retirement accounts, just at the time that us Baby Boomers are beginning to retire - or wish to retire.

Can we change the outlook? Perhaps. But more on that in later postings.

THIS, THAT & THE OTHER THING

THIS:
The House of Representatives, at least a majority, has seen the light. They have passed the Emergency Economic Stabilization Act of 2008 (EESA) as previously passed by the Senate.

The vote: 263 Yea 171 Nay

THAT:
Democrats: 172 Yea 63 Nay

Republicans: 91 Yea 108 Nay

I look forward to seeing how the voters will respond on November 4.

THE OTHER THING:
While some may say that the stock markets are relieved that the bill was passing, investors are realistic enough to know that what overshadows everything still remains as a huge weight on the economy:

1. Will the EESA help?
2. Will the Federal Reserve cut interest rates in an attempt to stabilize economic deterioration?
3. Will foreign central banks - really really key in all of this - also cut interest rates and stop their ridiculous fight against non-existent inflation?
4. Will further economic stimulus by the federal government be needed?
5. Now that it should be self-evident that we are in a recession, how long and how deep will it be? It looks like a really big one from this chair.
6. How bad will corporate earnings be in the 3rd and 4th quarters of this year? And how bad will they be in 2009 and beyond?
7. How much more stock will unregulated hedge funds continue to dump on the markets?
8. After a new president is sworn in next year, what will the world look like? What flexibility will he have to restructure regulatory bodies, implement key spending programs, and revise tax structures? Will promises be kept, delayed, or simply altered?


Markets hate uncertainty. Now they will focus quite a bit more on recession, which may be the deepest and most prolonged since World War II (we don't mention the dreaded "Depression" word here, hahah).

As of the time of this writing, the Dow Jones Industrials Average has swung about 631 points since opening this morning - about 350-points up, then retreating 281-points from its intraday peak an hour ago. It will continue to be a wild ride.


If you are an investor, two things to keep in mind: 1) safety first, 2) safe dividends next.

Lobbyist Hired by Freddie Mac to Work on McCain Is Now Senator's Aide





By Matthew Mosk and David S. Hilzenrath
Washington Post Staff Writers
Friday, October 3, 2008; A09

When mortgage giant Freddie Mac feared several years ago that Sen. John McCain was too outspoken on the issue of executive pay, it pinpointed a lobbyist known for his closeness to McCain and hired him to work with the senator.

Mark Buse, a longtime McCain adviser who had been staff director of the Senate commerce committee, signed on as a Freddie Mac lobbyist, and his firm, ML Strategies, earned $460,000 in lobbying fees in late 2003 and 2004, according to lobbying disclosures. Buse is now chief of staff at McCain's Senate office.

Buse was one of many strategic hires made by Freddie Mac in its efforts to sew up support and manage opponents on Capitol Hill, a push that peaked in 2004 with the retention of 34 outside lobbying firms. Over the past decade, Freddie spent more than $95 million on lobbying, while its sister company, Fannie Mae, spent more than $79 million.

The connections have become a hot political issue for both Republicans and Democrats in the presidential campaign. McCain has highlighted Democratic Sen. Barack Obama's association with high-level figures from Fannie Mae, including former chairman and chief executive James Johnson, who once led Obama's vice presidential search.

McCain's own entanglements include his campaign manager, Rick Davis, who earned more than $2 million as president of an advocacy group that defended Fannie and Freddie against stricter regulation. Davis's lobbying firm, Davis Manafort, also received monthly payments of $15,000 from Freddie Mac as recently as August.

The story of how Buse came to get involved is emblematic of the interconnections among Fannie, Freddie and the lawmakers whose support was critical for their business.

McCain campaign spokesman Brian Rogers said the hiring of Buse did not influence McCain. "I think the reality is that John McCain takes positions, you know, based on what he believes is in the public interest, period," Rogers said. "If these folks thought they were getting something out of John McCain . . . it's not based in fact."

Buse was providing Freddie Mac "with advice on how to deal with issues of concern to them, you know, both in the commerce committee and in the Senate at large," Rogers said. Through the McCain spokesman, Buse declined to comment.

Freddie Mac's interest in Buse dates back to mid-2003. That May, McCain presided over a hearing on executive pay at which he condemned "a disconnect between CEO pay and performance at many of America's corporations" and said that "these kinds of excesses are making a lot of Americans angry."

Freddie Mac became a target of criticism the following month when the company announced it had fired its president and forced out two other top executives. Soon Freddie Mac revealed that fired president David W. Glenn would get stock options worth nearly $6 million. Leland C. Brendsel, who was forced to retire as chief executive after 21 years at the company, walked away with compensation worth $24 million.

Concern over the golden parachutes sparked calls in Congress for tougher oversight. McCain told a newspaper in August 2003 that he planned to hold hearings on executive compensation oversight and on Fannie Mae and Freddie Mac.

"Senator McCain was talking about limiting executive compensation, and Buse was retained to nip that in the bud," said a former lobbyist who insisted on anonymity because of continuing relationships with the companies.

The commerce committee, which McCain chaired, considered taking up legislation to address Fannie and Freddie in 2003 but refrained from doing so because it lacked jurisdiction, Rogers said.

McCain continued to talk about the compensation issue. But inside Freddie Mac, Buse's effort was viewed as "hugely successful," a former Freddie Mac lobbyist said. "The statements didn't go away completely, but in terms of Senator McCain doing anything about it, it just never materialized. As far as I know, Buse was the only person working that issue for Fannie or Freddie, so he got a lot of credit internally for the results."

As a Freddie Mac lobbyist, Buse participated in a meeting on executive compensation with aides to members of the commerce committee, said sources informed about the matter who insisted on anonymity to avoid professional repercussions. Freddie Mac spokeswoman Sharon McHale said she was unable to get any information on Buse's relationship with the company.

McCain campaign spokesman Rogers said Buse "met with, obviously, a variety of staff." He said Buse never spoke with McCain about Freddie Mac, Fannie Mae or executive compensation.

McCain co-sponsored a bill to overhaul regulation of Fannie and Freddie in September 2003 and again in 2006. "He helped sound the alarm on the risk that Fannie and Freddie posed to the taxpayers unless they were reformed," Rogers said. McCain also advocated requiring companies to count stock option awards as expenses, a move opposed by many corporations because it could depress their earnings and make options less plentiful.

The lobbying reports filed by Buse's firm say his work for Freddie Mac involved "general issues affecting the mortgage industry." The forms listed four other ML Strategies employees as lobbyists for Freddie Mac, but a spokeswoman for the firm, Gina P. Addis, referred questions about their work to Buse.

Buse was nicknamed "The Ferret" because he helped his boss, McCain, find pork-barrel provisions buried in legislation. McCain has said he considered Buse to be like a son.

Buse left the commerce committee staff to lobby, signing on clients as diverse as oil giant Exxon Mobil, Wall Street firm Goldman Sachs and the Pharmaceutical Research and Manufacturers of America, according to the government records. He also represented telecommunications clients affected by the committee.

Buse returned to McCain's office this year as chief of staff.

Davis, the McCain campaign manager, last week defended his long association with the Homeownership Alliance, saying he served as "the public face of an organization that promoted homeownership."

But people who worked for Fannie Mae, Freddie Mac and the Homeownership Alliance said the group's central mission was promoting Fannie and Freddie.

Kenneth A. Guenther, a former alliance chairman, said it was "committed to putting out the word in terms of the good things that Fannie and Freddie were doing to promote home ownership, particularly minority home ownership."

Davis said he had taken a leave of absence from his lobbying firm, Davis Manafort, for 18 months and earned no income from the firm. He added: "I have taken no compensation from my company, and our work for the Homeownership Alliance had ended about a year, year-and-a-half before that even started. So it's been over three years since there's been any activity in this area and since I've had any contact with those folks."

Sources familiar with the arrangements, however, corroborated news reports last week that Davis Manafort received monthly payments of $15,000 from Freddie Mac as recently as August. As first reported by Newsweek, documents on file with the Virginia State Corporation Commission show that as of March 31, Davis was still listed as an officer and director of the firm.

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/02/AR2008100203812.html?nav=rss_politics

Staff writer Zachary A. Goldfarb, research director Lucy Shackelford and staff researcher Julie Tate contributed to this report.

Crisis Hits Main Street as Employers Cut More Jobs



EXCERPTED - read the complete story at:
http://www.bloomberg.com/apps/news?pid=20601087&sid=abRY32CorQYI&refer=home

By Shobhana Chandra and Rich Miller

Oct. 3 (Bloomberg) -- U.S. payrolls plunged in September, signaling the economy may be heading for its worst recession in at least a quarter century as the 13-month-old credit crisis on Wall Street finally hits home on Main Street.

Employers cut the most jobs in five years in September as cash-squeezed companies pulled back in an effort to bolster pinched profits. In its last employment report before Americans choose their next president, the Labor Department said the unemployment rate was 6.1 percent, a climb of 1.4 percentage points from a year before.

"If credit markets remain dysfunctional, the current recession could turn out to be as severe as any in the postwar period," said former Federal Reserve governor Lyle Gramley, now senior economic adviser at the Stanford Group Co. in Washington.

The spreading crisis is also having reverberations on the campaign trail, as polls show anxious voters increasingly see Democrat Barack Obama as the candidate best placed to see the U.S. through its economic travails. The unemployment rate has only risen twice in the year leading up to elections since World War II, and in each case the incumbent party lost.

"This country can't afford Senator McCain's plan to give America four more years of the same policies that have devastated our middle class and our economy for the last eight," Obama, 47, said in a statement.

McCain's Reaction

Arizona Senator John McCain, 72, took the opportunity to paint his opponent as a tax-and-spend liberal, whose prescriptions would exacerbate the crisis.

"Unlike Senator Obama, I do not believe we will create one single American job by increasing taxes, going on a massive spending binge, and closing off markets," McCain said in a statement. "Our nation cannot afford Senator Obama's higher taxes."

Job losses accelerated as the credit crisis deepened last month, forcing the failure or government takeovers of Lehman Brothers Holdings Inc., Fannie Mae, Freddie Mac and American International Group Inc.

The figures came hours before a scheduled vote in the House of Representatives on a $700 billion rescue plan for the U.S. financial industry pushed by Treasury Secretary Henry Paulson. The Senate approved the legislation two days ago after the House rejected an initial version of the bill Sept. 29.


Today's report showed that hours worked -- considered a good proxy for the state of the overall economy -- matched the lowest level since records began in 1964. That indicates the likely current recession may be at least as severe as the 1981-82 slump, during which gross domestic product shrank by 2.7 percent.

Payrolls fell by 159,000 in September, the Labor Department said in Washington. Aside from a 9,000 gain in government payrolls, all major categories showed declines except education and healthcare.


"The really bad news here is that job losses are now widespread," said Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm. "The problems in housing and manufacturing are now spreading everywhere. We are in a recession, there is no debate about that."

Health Services

Even the vibrant health-services industry is showing signs of succumbing to the economy's troubles. Health care employment rose 17,000, about half the average monthly gain for the prior 12 months.



Total payrolls were forecast to drop 105,000 after declining by a previously estimated 84,000 in August, according to the median of 76 economists surveyed by Bloomberg News. The jobless rate was projected to remain at 6.1 percent.

Rate Forecasts

Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said the unemployment rate may eventually rise to more than 7 percent as the credit crunch takes its toll on the economy. If that happens, that would make the overall rise in unemployment the biggest since the early 1980's.

Workers' average hourly wages rose 3 cents, or 0.2 percent, to $18.17 from the prior month. Hourly earnings were 3.4 percent higher than September 2007. Economists surveyed by Bloomberg had forecast a 0.3 percent increase from August and a 3.6 percent gain for the 12-month period.

After today, the total decline in payrolls so far this year has reached 760,000. The economy created 1.1 million jobs in 2007.

Americans will go to the polls on Nov. 4 and the October jobs report is due Nov. 7.

`Angry' Voters

"Voters are extremely angry, and they want someone to blame," said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.

Obama has opened up a lead over Republican rival John McCain in the aftermath of their first debate and amid growing concerns about the economy, according to a Pew Research Center survey taken Sept. 27 to Sept. 29. A mid-September poll from Washington- based Pew had shown the candidates were in a statistical tie.

Earlier in September, a Bloomberg/Los Angeles Times poll showed more respondents said Obama would do a better job handling the financial crisis than McCain, and almost half of the voters believed he had better ideas to strengthen the economy than his rival.

Factory payrolls fell 51,000 after decreasing 56,000 in August. Economists had forecast a drop of 57,000.

Today's report also reflected the housing slump. Payrolls at builders declined 35,000 after falling 13,000. Financial firms decreased payrolls by 17,000, the most since November last year.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 82,000 workers after eliminating 16,000 in the previous month. Retail payrolls slid by 40,100 after a 25,400 drop.

Hewlett-Packard

In the past month, Hewlett-Packard Co., the world's largest personal-computer maker, announced it will cut 24,600 jobs, and auto-parts maker Federal-Mogul Corp. said it would eliminate 4,000 positions globally.

Marriott International Inc., the world's largest hotel chain, yesterday reported third-quarter profit fell 28 percent as U.S. companies and consumers cut back on travel.

Without action from Congress, "the resulting credit squeeze could threaten businesses," Chief Financial Officer Arne Sorenson said on a conference call. There are "tens of thousands of jobs at stake in our company alone, and we are typical."

Mounting job cuts will further limit consumer spending, which accounts for more than two-thirds of the economy. A Bloomberg survey in September predicted spending will be unchanged this quarter, the weakest performance since 1991.

The ISM on Oct. 1 said manufacturing shrank in September at the fastest pace since the last recession in 2001. The odds the central bank will lower its benchmark rate by a half percentage point, to 1.5 percent, were almost 100 percent today, up from 32 percent a week ago.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

The Reckoning

This story is "ripped" from the headlines of today's New York Times. It is a detailed and scathing indictment of Bush administration anti-regulatory policies, gutting regulatory oversight and competence, and the incompetence of the S.E.C. under Bush.

As the article indicates, the entire 55-minute session that just may have led to the current nationwide/worldwide financial crisis can be heard at the following link:

http://graphics8.nytimes.com/packages/audio/national/20081003_SEC_AUDIO/SEC_Open_Meeting_04282004.mp3



October 3, 2008

Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk

By STEPHEN LABATON

“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.

As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.

Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.

Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.

How could Mr. Cox have been so wrong?

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.

One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”

Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.

Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.

“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”

The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.

The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.

The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.

The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”

Drive to Deregulate

The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.

A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.

“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”

As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.

The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.

A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.

The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.

“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.

In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.

“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”

He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.

Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.

He said in a recent interview that he was never called by anyone from the commission.

“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”

Policing Wall Street

A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”

The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”

Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.

Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.

Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.

In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.

‘Stakes in the Ground’

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.

The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.

Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.

“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.

Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”

He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.

“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”

But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”

“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”

http://www.nytimes.com/2008/10/03/business/03sec.html?pagewanted=1&_r=1&ref=business

Copyright 2008 The New York Times Company

Thursday, October 02, 2008

FREE SPEECH - REPUBLICAN STYLE?

For three weeks now, my neighbors and I have been the victims of political signage theft and vandalism. I admit, I display the most signs in our area.

Last night, all of our signs, including the two that ask to Pray For Our Troops by Bringing Them Home, were spray-painted - with red paint of course.

Had the culprits used blue paint or some other nondescript color, I might have been confused.

Typically, the Republican signs in our neighborhood are left untouched.

Once upon a time we had a Constitution, now torn to shreds by the Bush administration and their supporters. Apparently the "more of the sames/McCains" hold to the same principles.

We can all agree to disagree. But it only works so long as people can restrain themselves from vandalism and the ongoing abridgment of our Constitutional rights.

Oh well. $100 of yard signs down the drain.

Warren Buffet

Follow the link to Charlie Rose's October 1, 2008 conversation with Warren Buffett.

http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

From 3 to 451

451 Pages.

And you may have thought that the House's 110-page failed bill was long. The 451-page Senate bill includes essentially the original 110-page House bill. But in order for Senate leaders to encourage/assure its passage and its attractiveness to members of the House, they open the flood gates to 340-pages of "stuff." All told, it adds up to something like $150 billion of spending and tax breaks.

Sadly, I didn't see the tax credit for "Clear The Mist" in there. But the bill is loaded with gobs of stuff for alternative fuels industries, rum, arrows, hurricane and disaster relief. And then there's a one-year relief from the Alternative Minimum Tax. Well OK, that one DOES affect me.

There's child tax credits, a temporary increase in FDIC deposit insurance limits to $250,000.

Look. It's a Christmas list, no doubt. But the vast majority of the "stuff" is "stuff" that would have been the subject of separate pieces of legislation before yearend anyway.

So many people may fret over all of this. If it gets the job done - saving the U.S. economy from failure, so be it. Keep this in mind: The new Congress that will be seated in 2009 can make changes to this legislation. Further, perhaps good news for you anti-earmark folks, what else could possibly be earmarked in the year to come? It seems like everything but a tax credit for "Clear The Mist" is in the Senate legislation.

By the way, if there is something you'd like to have for Christmas, now is the time to contact your Congressperson and get it added to the House bill for tomorrow's likely vote.

Happy Holidays.

U.S. SENATE ACTS...and then some...Rum & Arrows

Happy October!

The U.S. Senate voted 74-25 to approve a plan to stabilize the U.S. economy. Almost anyone reviewing the Senate bill, will find problems with it. Despite McCain and some of his Republican compatriots' concerns about any legislation that becomes Christmas tree - call them earmarks or not - this legislation is loaded with something for everyone. Why? The justification is to assure its passage in the House.

Whether the strategy will work, we'll see over the next few days.

First, the core provisions of the bill:

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short Title.
“Emergency Economic Stabilization Act of 2008.”

Section 2. Purposes.
Provides authority to the Treasury Secretary to restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans.

Section 3. Definitions.
Contains various definitions used under this Act.

Title I. Troubled Assets Relief Program.

Section 101. Purchases of Troubled Assets.
Authorizes the Secretary to establish a Troubled Asset Relief Program (“TARP”) to purchase troubled assets from financial institutions. Establishes an Office of Financial Stability within the Treasury Department to implement the TARP in consultation with the Board of Governors of the Federal Reserve System, the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision and the Secretary of Housing and Urban Development.

Requires the Treasury Secretary to establish guidelines and policies to carry out the purposes of this Act.

Includes provisions to prevent unjust enrichment by participants of the program.

Section 102. Insurance of Troubled Assets.
If the Secretary establishes the TARP program, the Secretary is required to establish a program to guarantee troubled assets of financial institutions.

The Secretary is required to establish risk-based premiums for such guarantees sufficient to cover anticipated claims. The Secretary must report to Congress on the establishment of the guarantee program.

Section 103. Considerations.
In using authority under this Act, the Treasury Secretary is required to take a number of considerations into account, including the interests of taxpayers, minimizing the impact on the national debt, providing stability to the financial markets, preserving homeownership, the needs of all financial institutions regardless of size or other characteristics, and the needs of local communities. Requires the Secretary to examine the long-term viability of an institution in determining whether to directly purchase assets under the TARP.

Section 104. Financial Stability Oversight Board.
This section establishes the Financial Stability Oversight Board to review and make recommendations regarding the exercise of authority under this Act. In addition, the Board must ensure that the policies implemented by the Secretary protect taxpayers, are in the economic interests of the United States, and are in accordance with this Act.

The Board is comprised of the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development.

Section 105. Reports.
Monthly Reports: Within 60 days of the first exercise of authority under this Act and every month thereafter, the Secretary is required to report to Congress its activities under TARP, including detailed financial statements.

Tranche Reports: For every $50 billion in assets purchased, the Secretary is required to report to Congress a detailed description of all transactions, a description of the pricing mechanisms used, and justifications for the financial terms of such transactions.

Regulatory Modernization Report: Prior to April 30, 2009, the Secretary is required to submit a report to Congress on the current state of the financial markets, the effectiveness of the financial regulatory system, and to provide any recommendations.
Section 106. Rights; Management; Sale of Troubled Assets; Revenues and Sale Proceeds.
Establishes the right of the Secretary to exercise authorities under this Act at any time. Provides the Secretary with the authority to manage troubled assets, including the ability to determine the terms and conditions associated with the disposition of troubled assets. Requires profits from the sale of troubled assets to be used to pay down the national debt.

Section 107. Contracting Procedures.
Allows the Secretary to waive provisions of the Federal Acquisition Regulation where compelling circumstances make compliance contrary to the public interest. Such waivers must be reported to Congress within 7 days. If provisions related to minority contracting are waived, the Secretary must develop alternate procedures to ensure the inclusion of minority contractors.

Allows the FDIC to be selected as an asset manager for residential mortgage loans and mortgage-backed securities.

Section 108. Conflicts of Interest.
The Secretary is required to issue regulations or guidelines to manage or prohibit conflicts of interest in the administration of the program.

Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.

Section 110. Assistance to Homeowners.
Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.

Section 111. Executive Compensation and Corporate Governance.
Provides that Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets. Where Treasury buys assets directly, the institution must observe standards limiting incentives, allowing clawback and prohibiting golden parachutes. When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.
Section 112. Coordination With Foreign Authorities and Central Banks.
Requires the Secretary to coordinate with foreign authorities and central banks to establish programs similar to TARP.

Section 113. Minimization of Long-Term Costs and Maximization of Benefits for Taxpayers.
In order to cover losses and administrative costs, as well as to allow taxpayers to share in equity appreciation, requires that the Treasury receive non-voting warrants from participating financial institutions.

Section 114. Market Transparency.
48-hour Reporting Requirement: The Secretary is required, within 2 business days of exercising authority under this Act, to publicly disclose the details of any transaction.

Section 115. Graduated Authorization to Purchase.
Authorizes the full $700 billion as requested by the Treasury Secretary for implementation of TARP. Allows the Secretary to immediately use up to $250 billion in authority under this Act. Upon a Presidential certification of need, the Secretary may access an additional $100 billion. The final $350 billion may be accessed if the President transmits a written report to Congress requesting such authority. The Secretary may use this additional authority unless within 15 days Congress passes a joint resolution of disapproval which may be considered on an expedited basis.

Section 116. Oversight and Audits.
Requires the Comptroller General of the United States to conduct ongoing oversight of the activities and performance of TARP, and to report every 60 days to Congress. The Comptroller General is required to conduct an annual audit of TARP. In addition, TARP is required to establish and maintain an effective system of internal controls.
Section 117. Study and Report on Margin Authority.

Directs the Comptroller General to conduct a study and report back to Congress on the role in which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis.

Section 118. Funding.
Provides for the authorization and appropriation of funds consistent with Section 115.

Section 119. Judicial Review and Related Matters.
Provides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law.

Section 120. Termination of Authority.
Provides that the authorities to purchase and guarantee assets terminate on December 31, 2009. The Secretary may extend the authority for an additional year upon certification of need to Congress.

Section 121. Special Inspector General for the Troubled Asset Relief Program.
Establishes the Office of the Special Inspector General for the Troubled Asset Relief Program to conduct, supervise, and coordinate audits and investigations of the actions undertaken by the Secretary under this Act. The Special Inspector General is required to submit a quarterly report to Congress summarizing its activities and the activities of the Secretary under this Act.

Section 122. Increase in the Statutory Limit on the Public Debt.
Raises the debt ceiling from $10 trillion to $11.3 trillion.

Section 123. Credit Reform.
Details the manner in which the legislation will be treated for budgetary purposes under the Federal Credit Reform Act.

Section 124. Hope for Homeowners Amendments.
Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.

Section 125. Congressional Oversight Panel.
Establishes a Congressional Oversight Panel to review the state of the financial markets, the regulatory system, and the use of authority under TARP. The panel is required to report to Congress every 30 days and to submit a special report on regulatory reform 4 prior to January 20, 2009. The panel will consist of 5 outside experts appointed by the House and Senate Minority and Majority leadership.

Section 126. FDIC Enforcement Enhancement.
Prohibits the misuse of the FDIC logo and name to falsely represent that deposits are insured. Strengthens enforcement by appropriate federal banking agencies, and allows the FDIC to take enforcement action against any person or institution where the banking agency has not acted.

Section 127. Cooperation With the FBI.
Requires any federal financial regulatory agency to cooperate with the FBI and other law enforcement agencies investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products.

Section 128. Acceleration of Effective Date.
Provides the Federal Reserve with the ability to pay interest on reserves.

Section 129. Disclosures on Exercise of Loan Authority.
Requires the Federal Reserve to provide a detailed report to Congress, in an expedited manner, upon the use of its emergency lending authority under Section 13(3) of the Federal Reserve Act.

Section 130. Technical Corrections.
Makes technical corrections to the Truth in Lending Act.

Section 131. Exchange Stabilization Fund Reimbursement.
Protects the Exchange Stabilization Fund from incurring any losses due to the temporary money market mutual fund guarantee by requiring the program created in this Act to reimburse the Fund. Prohibits any future use of the Fund for any guarantee program for the money market mutual fund industry.

Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.

Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.

Section 134. Recoupment.
Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.

Section 135. Preservation of Authority.
Clarifies that nothing in this Act shall limit the authority of the Secretary or the Federal Reserve under any other provision of law.

Section 136. Temporary Increase in Deposit and Share Insurance Coverage. Raises the FDIC and the National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000 until December 31, 2009. Temporarily raises the borrowing limits at the Treasury for the FDIC and the National Credit Union Share Insurance Fund.

Title II—Budget-Related Provisions

Section 201. Information for Congressional Support Agencies.
Requires that information used by the Treasury Secretary in connection with activities under this Act be made available to CBO and JCT.

Section 202. Reports by the Office of Management and Budget and the Congressional Budget Office.

Requires CBO and OMB to report cost estimates and related information to Congress and the President regarding the authorities that the Secretary of the Treasury has exercised under the Act.

Section 203. Analysis in President’s Budget.
Requires that the President include in his annual budget submission to the Congress certain analyses and estimates relating to costs incurred as a result of the Act; and

Section 204. Emergency Treatment.
Specifies scoring of the Act for purposes of budget enforcement.

Title III—Tax Provisions

Section 301. Gain or Loss From Sale or Exchange of Certain Preferred Stock.
Details certain changes in the tax treatment of losses on the preferred stock of certain GSEs for financial institutions.

Section 302. Special Rules for Tax Treatment of Executive Compensation of Employers Participating in the Troubled Assets Relief Program.

Applies limits on executive compensation and golden parachutes for certain executives of employers who participate in the auction program.

Section 303. Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness.

Extends current law tax forgiveness on the cancellation of mortgage debt.


BUT WAIT. THAT'S NOT ALL.


The Bill is loaded with tax credits and other "incentives" for a wide range of constituencies. But that's how Washington works. It should be no surprise.

Clean energy tax incentives totaling approximately $18 billion, fully paid for by several offset provisions including a delay of the tax deduction for domestic manufacturing activities of major American oil and gas companies. Another offset provision tightens the rules by which oil and gas companies pay taxes on income earned overseas, and makes general fund monies available with increased payments into the oil spill liability trust fund as new drilling is considered. The incentives are also funded in part by a one year extension of the Federal Unemployment Tax Act surtax at the current level, and by increasing reporting requirements for brokers on sales of stock.

An increase in the income threshold at which Americans become subject to the higher
alternative minimum tax. This measure would protect more than 21 million taxpayers
from higher taxes at a cost of $64 billion. The cost of the AMT “patch” is not offset.

Extensions of expiring family and business tax cuts and other policies – including an
expansion of the child tax credit, legislation providing parity for mental health treatment in the U.S. health care system, and tax relief for victims of natural disasters. Extensions of expiring tax cuts are partially offset by requiring hedge fund managers and others to account for deferred compensation – income held in offshore accounts and other corporate structures – as it accrues, rather than avoiding appropriate and timely income taxes.

INDIVIDUAL EXTENDER PROVISIONS

Deduction of State and Local General Sales Taxes. The American Jobs Creation Act (AJCA)
provided that a taxpayer may elect to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction. The provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $3.304 billion over ten years.

Qualified Tuition Deduction. The Economic Growth and Tax Relief Reconciliation Act
(EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns). This deduction expired on December 31, 2007. The proposal would extend the deduction to the end of 2009. The estimated cost of this proposal is $5.333 billion over ten years. Teacher Expense Deduction. The bill extends the provision allowing teachers an above-the-line deduction for up to $250 for educational expenses. The provision expired on December 31, 2007. The proposal extends the deduction to the end of 2009. The proposal is effective for taxable years
beginning after December 31, 2007. The estimated cost of this proposal is $410 million over ten years.

Additional Standard Deduction for Real Property Taxes. The Housing and Economic
Recovery Act of 2008 added a real property tax calculation to the standard deduction for taxpayers who do not itemize. The real property tax deduction is the lesser of the amount allowable as a deduction of State and local and foreign real property taxes, or $500 ($1,000 in the case of a joint return). The provision expires at the end of 2008. The proposal extends the provision to the end of 2009. The proposal is effective on the date of enactment. The estimated cost of the proposal is $1.495 billion over ten years. IRA Rollover Provision. The Pension Protection Act of 2006 (PPA) created a provision allowing taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations. This tax benefit expired on December 31, 2007. The proposal would extend the provision through 2009. The proposal is effective for distributions after December 31, 2007. The estimated cost of this proposal is $795 million over ten years.

Treatment of Certain Dividends of Regulated Investment Companies (RICs). The bill
extends a provision allowing a RIC, under certain circumstances, to designate all or a portion of a dividend as an “interest-related dividend,” by written notice mailed to its shareholders not later than 60 days after the close of its taxable year. In addition, an interest-related dividend received by a foreign person generally is exempt from U.S. gross-basis tax under sections 871(a), 881, 1441 and 1442 of the Code. The proposal extends the treatment of interest-related dividends and short-term capital gain dividends received by a RIC to taxable years of the RIC beginning before
January 1, 2010. The proposal is effective for dividends with respect to taxable years of RICs beginning after December 31, 2007. The estimated cost of this proposal is $134 million over ten years.

Estate Tax Look-Through for Certain RIC Stock held by Nonresidents. Although stock
issued by a domestic corporation generally is treated as property within the United States, stock of a RIC that was owned by a nonresident non-citizen is not deemed property within the United States in the proportion that, at the end of the quarter of the RIC’s taxable year immediately before a decedent’s date of death, the assets held by the RIC are debt obligations, deposits, or other property that would be treated as situated outside the United States if held directly by the estate (the “estate tax look-through rule for RIC stock”). This estate tax look-through rule for RIC stock does not apply to estates of decedents dying after December 31, 2007. The proposal permits the estate tax look3 through rule for RIC stock to apply to estates of decedents dying before January 1, 2010. The proposal is effective for decedents dying after December 31, 2007. This proposal has a negligible revenue effect.

Extend the Treatment of RICs as “Qualified Investment Entities”. The proposal would
extend the inclusion of a RIC within the definition of a “qualified investment entity” under section 897 of the Code through December 31, 2009, for those situations in which that inclusion otherwise expired at the end of 2007. The proposal is effective on January 1, 2008. The estimated cost of this proposal is $20 million over ten years.

BUSINESS EXTENDER PROVISIONS

Research and Development Credit. The bill would extend the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year. The provision expired December 31, 2007. The proposal would extend current law to the end of 2009. In addition, the proposal would increase the alternative simplified credit from 12% to 14% for the 2009 tax year, and repeal the alternative incremental research credit for the 2009 tax year. The proposal is effective for amounts paid or incurred after December 31, 2007. The estimated cost of this proposal is $19.084 billion over ten years.

New Markets Tax Credit. Current law provides a credit for taxpayers who hold a qualified equity investment on a credit allowance date. The provision expires December 31, 2008. The proposal would extend the provision through 2009. The proposal is effective for investments made after December 31, 2008. The estimated cost of this proposal is $1.315 billion over ten years.

Exception under Subpart F for Active Financing Income. The U.S. parent of a foreign
subsidiary engaged in a banking, financing, or similar business is eligible for
deferral of tax on such subsidiary’s earnings if the subsidiary is predominantly engaged in such business and conducts substantial activity with respect to such business. The subsidiary must pass an entity level income test to demonstrate that the income is active income and not passive income. The provision expires December 31, 2008. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2008. The estimated cost of this proposal is $3.97 billion over ten years.

Look-Through Treatment of Payments between Related CFCs under the Foreign Personal
Holding Company Rules. The bill allows deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations (CFC). This provision allows U.S. taxpayers to deploy capital from one CFC to another without triggering U.S. tax. The provision expires December 31, 2008. The proposal extends present law to the end of 2009. The proposal is effective for tax years beginning after December 31, 2008. The estimated cost of this proposal is $611 million over ten years.

15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and Retail
Improvements. In AJCA, Congress shortened the cost recovery of certain leasehold
improvements and restaurant property from 39 to 15 years. The proposal would extend the
provision to the end of 2009 and allows retail owners and new restaurants to receive the shortened recovery period for 2009 only. The extension is effective for property placed in service after December 31, 2007. The allowance of the 15 year depreciation to retail and new restaurants is effective for property placed in service after December 31, 2008. The estimated cost of this proposal is $8.721 billion over ten years.

Modification of Tax Treatment of Certain Payments to Controlling Exempt Organizations.
In general, interest, rent, royalties, and annuities paid to a tax–exempt organization from a controlled entity are treated as unrelated business income of the tax-exempt organization. The PPA provided that if a payment to a tax-exempt organization by a controlled entity is less than fair market value, then the payment is excludable from the tax-exempt organization’s unrelated business income. The provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for payments received or accrued after December 31, 2007. The estimated cost of this proposal is $47 million over ten years.

Basis Adjustment to Stock of an S Corporation Making Charitable Contributions of
Property. Prior to the PPA, if an S corporation made a contribution to a charity, shareholders reduced the basis in their stock by their pro rata share of the fair market value of the contribution. The PPA provided the amount of a shareholder’s basis reduction in the S corporation stock will be equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. The provision expired December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal would also make a technical correction clarifying the application of this provision. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $132 million over ten years.

Temporary Increase in Limit on Cover over of Rum Excise Tax Revenues to Puerto Rico
and the Virgin Islands. The present law imposes a $13.50 per proof gallon excise tax on
distilled spirits produced in or imported into the United States. The Code provides a payment to Puerto Rico and the Virgin Islands of the excise tax on rum imported into the United States. The payment is limited to $10.50 per proof gallon. This was increased to $13.25 per proof gallon during the period July 1, 1999 through December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for articles brought into the United States after December 31, 2007. The estimated cost of this proposal is $192 million over ten years.

American Samoa Economic Development Credit. Certain domestic corporations operating in
American Samoa were eligible for a possessions tax credit, which offsets their U.S. tax liability on income earned in American Samoa from active business operations, sales of assets used in a business, or certain investments in American Samoa. Further, the credit was held to an economic activity-based limit, measuring the credit against wages, depreciation, and American Samoa income taxes. The provision expired December 31, 2007. The proposal extends the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $33 million over ten years.

Mine Rescue Team Training Credit. Present law provides a credit of up to $10,000 for the training of mine rescue team members. The provision expires on December 31, 2008. The proposal extends present law to the end of 2009. The estimated cost of the proposal is $4 million over ten years.

Election to Expense Advanced Mine Safety Equipment. Present law provides 50% immediate
expensing for qualified underground mine safety equipment (that goes above and beyond current safety equipment requirements), including: (1) communications technology enabling miners to remain in constant contact with an individual above ground; (2) electronic tracking devices that enable an individual above ground to locate miners in the mine at all times; (3) self-contained self-rescue emergency breathing apparatuses carried by the miners and additional oxygen supplies stored in the mine; and (4) mine atmospheric monitoring equipment to measure levels of carbon monoxide, methane, and oxygen in the mine. This provision will encourage mining companies to invest in safety equipment that goes above and beyond current safety equipment requirements. The provision expires December 31, 2008. The proposal would extend present law to the end of 2009. The proposal is estimated to be revenue neutral over ten years.

Deduction Allowable with Respect to Income Attributable to Domestic Production Activities in Puerto Rico. The bill extends a provision allowing a section 199 domestic production activities deduction for activities in Puerto Rico. This provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $243 million over ten years.

Qualified Zone Academy Bonds (QZABs). QZABs help school districts with low-income
populations save on interest costs associated with public financing school (below the postsecondary level) renovations and repairs. QZABs cannot be used for new construction but can be used for the following activities: renovating and repairing buildings, investing in equipment and up-to-date technology, developing challenging curricula, and training quality teachers. The QZABs offer the holder a federal tax credit instead of interest (there has been an allocation of $400 million of QZABs each year since 1998). The QZAB provision expired on December 31, 2007. This proposal allows another $400 million of issuing authority to state and local governments for 2008 and 2009 for qualified zone academy bonds. The proposal also modifies the provision. The proposal is effective for obligations issued after December 31, 2007. The estimated cost of this proposal is $379 million over ten years.

Indian Employment Credit. The proposal allows a business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The credit is for wages and health insurance costs paid to qualified employees (up to $20,000) in the current year over the amount paid in 1993. Wages for which the Work Opportunity Tax Credit is available are not qualified wages for the Indian employment tax credit. This provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for taxable years beginning after December 31, 2007. The estimated cost of this proposal is $119 million over ten years.

Accelerated Depreciation for Business Property on Indian Reservation. A special
depreciation recovery period applies to qualified Indian reservation property placed in service before January 1, 2008. In general, qualified Indian reservation property is property used predominantly in the active conduct of a trade or business within an Indian reservation, which is not used outside the reservation on a regular basis and was not acquired from a related person. This proposal would extend the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property to the end of 2009. The proposal is effective for property placed in service after December 31, 2007. The estimated cost of this proposal is $295
million over ten years.

Extend and Expand 50% Tax Credit for Certain Expenditures for Maintaining Railroad
Tracks. The railroad maintenance credit provides Class II and Class III railroads (short-line railroads) with a tax credit equal to 50% of gross expenditures for maintaining railroad tracks that they own or lease. The credit expired on December 31, 2007. The proposal extends the provision to the end of 2009, and allows the credit against the AMT. The proposal is effective for expenses paid or incurred during the taxable years beginning after December 31, 2007. The estimated cost of this proposal is $331 million over ten years.

7-Year Recovery Period for Certain Motorsports Racetrack Property. The bill extends a
special 7-year cost recovery period or property used for land improvement and support facilities at motorsports entertainment complexes. The provision expired on December 31, 2007. This proposal extends the provision to the end of 2009. The proposal is effective for property placed in service after December 31, 2007. The estimated cost of this proposal is $100 million over ten years.

Expensing of “Brownfields” Environmental Remediation Costs. The bill extends a provision allowing for the expensing of costs associated with cleaning up contaminated sites. The provision expired on December 31, 2007. This proposal extends present law to the end of 2009. The proposal is effective for property placed in service after December 31, 2007. The estimated cost of this proposal is $357 million over ten years.
Extend Work Opportunity Tax Credit (WOTC) for Hurricane Katrina Employees. The
proposal extends through August 28, 2009 the work opportunity tax credit for those employed within the Hurricane Katrina core disaster area. The proposal is effective on August 28, 2007. The estimated cost of this proposal is $29 million over ten years.
Extension of Increased Rehabilitation Credit for Structures in the Gulf Opportunity Zone.

The Gulf Opportunity Zone Act of 2005 increased the rehabilitation credit, within the Gulf Opportunity Zone, from 10 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure. It also increased the credit from 20 percent to 26 percent of qualified expenditures for any certified historic structure. This provision expires at the end of 2008. This proposal would extend the provision through December 31, 2009. The estimated cost of this proposal is $50 million over ten years.

Enhanced Charitable Deduction for Qualified Computer Contributions. The bill would
extend for two years, through 2009, a provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and postsecondary schools by allowing an enhanced deduction for such contributions. The proposal is effective for contributions made during taxable years beginning after December 31, 2007. The estimated cost of this proposal is $356 million over ten years.

Tax Incentives for Investments in the District of Columbia. The bill provides for the
designation of certain economically depressed census tracts within the District as the DC Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives. First time home buyers receive a $5,000 credit for DC. The bill extends the provision through the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $179 million over ten years.

Enhanced Charitable Deduction for Food Inventory. The bill would extend for two years,
through 2009, the provision allowing businesses to claim an enhanced deduction for the
contribution of food inventory. The proposal is effective for contributions made after December 31, 2007. The proposal also eliminates the percentage limitation for contributions made by certain farmers and ranchers after December 31, 2007, but before January 1, 2009. The estimated cost of this proposal is $149 million over ten years.

Enhanced Charitable Deduction for Contributions of Book Inventory to Schools. The bill
would extend a provision that allowing C corporations an enhanced charitable deduction for donations of books to schools, public libraries and literacy programs. This provision expired after December 31, 2007. The proposal extends the provision to the end of 2009. The proposal is effective for contributions made after December 31, 2007. The estimated cost of this proposal is $49 million over ten years.

Wool Trust Fund. The bill would extend a provision that reduces import duties on a limited quantity of imported wool fabrics and places duties otherwise collected on the import of certain wool products into the Wool Trust Fund, which promotes the competitiveness of American wool. The provision is extended for five years. The
estimated cost of the proposal is $148 million over ten years.

Special Expensing Rules for Certain Film and Television Productions. Under current law, a producer can elect to take a single-year deduction of up to $15 million in production costs incurred in the U.S. If the production costs are over $15 million, this deduction does not apply. The maximum deduction is increased to $20 million if the costs are significantly incurred in economically depressed areas. No other depreciation or amortization is allowed for a production for which this deduction is taken. The provision expires December 31, 2008. The proposal would extend the provision to the end of 2009. The proposal would also allow expensing of the first $15
million ($20 million if the costs are significantly incurred in economically depressed areas), regardless of the ultimate cost of the film. The proposal is effective for taxable years beginning after December 31, 2007. The estimated cost of this proposal is $81 million over ten years.

TAX ADMINISTRATION EXTENDER PROVISIONS

Permanent Authority for Undercover Operations. IRS’s authorization to use proceeds it
receives from undercover operations to offset necessary expenses incurred in such operations expired on December 31, 2007. Undercover operations are an integral part of IRS efforts to detect and prove noncompliance. The temporary status of this provision creates uncertainty as the IRS plans its undercover efforts from year to year. The proposal permanently authorizes the IRS to return funds collected through undercover operations back into the IRS undercover program. The proposal is effective on the date of enactment. The proposal raises less than $500,000 over ten years.

Permanent Authority to Disclose Information Related to Terrorist Activities. The bill would permanently extend the current-law terrorist activity provisions. The proposal is effective for disclosures after December 31, 2007. This proposal is estimated to have no revenue effect.

ADDITIONAL TAX RELIEF AND OTHER TAX PROVISIONS

Child Tax Credit. Currently, a taxpayer receives $1,000 tax credit for each qualifying child under the age of 17. If the amount of a taxpayer’s child tax credit is greater than the amount of the taxpayer’s income tax, the taxpayer may receive a refund if the income threshold is met. EGTRRA set the income threshold for child tax credit refundability at $10,000 (indexed). The threshold for 2008 is $12,050. The proposal lowers the refundable threshold for the child tax credit to $8,500 for the 2008 tax year. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of the proposal is $3.129 billion over ten years.

Provisions Related to Film and Television Productions. Under current law, many film and
television show production companies are unable to take advantage of the domestic production deduction. The proposal allows more film and television show production companies to use the domestic production deduction, which will encourage more production of films and television productions. This estimated cost of the proposal is $397 million over ten years.

Excise Tax Exemption for Wooden Practice Arrows Used by Children. Current law imposes
an excise tax of 39 cents, adjusted for inflation, on the first sale by the manufacturer, producer, or importer of any shaft of a type used to produce certain types of arrows. This proposal would exempt from the excise tax any shaft consisting of all natural wood with no laminations or artificial means to enhance the spine of the shaft used in the manufacture of an arrow that measures 5/16 of an inch or less and is unsuited for use with a bow with a peak draw weight of 30 pounds or more. The proposal is effective for shafts first sold after the date of enactment. The estimated cost of the proposal is $2 million over ten years.

Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008.
This bill would require private insurance plans that offer mental health benefits as part of the coverage to offer such benefits on par with the medical-surgical benefits. Any cost-sharing or benefit limits imposed on mental health services must not be any more restrictive than those imposed on med-surg services. The proposal is effective January 1, 2009. The proposal is estimated to cost $3.9 billion over 10 years.

Income Averaging for Exxon Valdez Litigation Amounts. The bill would allow commercial
fishermen and other individuals whose livelihoods were negatively impacted by the 1989 Exxon Valdez oil spill to average any settlement or judgment-related income that they receive in connection with pending litigation in the federal courts over three years for federal tax purposes. The bill would also allow these individuals to use these funds to make contributions to retirement accounts. The proposal is effective on the date of enactment. The estimated cost of the proposal is $49 million over ten years.
Certain Farming Business Machinery and Equipment Treated as 5-year Property. The
proposal provides a five year recovery period for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business, the original use of which commences with the taxpayer, and placed in service before January 1, 2010. For these purposes, the term “farming business” means a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity. A farming business includes processing activities that are normally incident to the growing, raising, or harvesting of agricultural or horticultural products. The proposal is effective
for property placed in service after the December 31, 2008. The estimated cost of the proposal is less than $500,000.

Modification of Penalty on Understatement of Taxpayer’s Liability by Tax Return
Preparer. The proposal changes the standards for imposition of the tax return preparer penalty. The preparer standard for undisclosed positions is reduced to “substantial authority.” The preparer standard for disclosed positions is “reasonable basis.” For tax shelters and reportable transactions to which section 6662A applies (i.e., listed transactions and reportable transactions with significant avoidance or evasion purposes), a tax return preparer is required to have a reasonable belief that such a transaction was more likely than not to be sustained on the merits. The proposal is effective for returns prepared after May 25, 2007. The estimated cost of the
proposal is $22 million over ten years.

OTHER PROVISIONS

Reauthorization of the Secure Rural Schools and Community Self-Determination Act of
2000 and Payment in Lieu of Taxes. The bill would reauthorize the Secure Rural Schools
program through 2011. It also adjusts the funding distribution formula to make it more equitable by taking into account historic payment levels to counties, average income levels in counties and acreage of federal land. Finally, the provision increases existing funding for the Payments in Lieu of Taxes program in the current fiscal year and fully-funds the program during FY2009-FY2012. The estimated cost of the proposal is $3.3 billion over ten years.

Transfer of Interest Earned by Abandoned Mine Reclamation Fund. The Coal Act Fairness
Alliance is composed of Super Reach-back Companies that fully paid Coal Act premiums. As a result of the decision in Eastern Enterprises v. Apfel, 524 U.S. 498 (1998), these companies sought a refund of monies paid to the United Mine Workers of America - Combined Fund. In 2006, the Super Reach-back Companies received a refund in the amount of $27 million (see 30 U.S.C. 1232(i)(C)). The Super Reach-back Companies, however, did not receive any interest payments on the premiums that the Companies paid to the Combined Fund. In Mary Helen Coal Corp. v. Hudson, 235 F.3d 207 (4th Cir. 2000), the Fourth Circuit examined whether interest on the premium payments that were refunded as a result of the Supreme Court’s decision in Eastern Enterprises was appropriate. The court held that a refund of the interest on the premium payments was appropriate for the final judgment companies as an element of their complete compensation and to give full effect to the Eastern Enterprises decision. In the case of the Super Reach-back
Companies, the lost interest on the premiums amount to $9 million. The provision would refund the lost interest to these Super Reach-back Companies. The estimated revenue loss of the proposal is $9 million over ten years.

MIDWESTERN DISASTER TAX RELIEF
Midwestern Disaster Area Tax Relief. The proposal provides tax relief for victims of the Midwestern disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin. The proposals are applicable to floods, severe storms, and tornadoes that are declared by FEMA on or after May 20, 2008, and before August 1, 2008.

A. RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR ASSISTANCE

The proposals immediately below benefit taxpayers located in all counties in the ten states mentioned above that are presidentially-declared (FEMA) major disaster areas determined to warrant individual assistance, individual and public assistance, or public only assistance due to flooding, tornadoes, or severe storms.

Qualified Disaster Recovery Assistance Distributions. The proposal waives the 10 percent penalty tax if a distribution from an individual retirement account (“IRA”) or tax-favored retirement plan (e.g., Code sections 401(k), 403(b), or 457(b) plans) is considered a qualified Disaster Recovery Assistance distribution (“qualified distribution”). A distribution is considered a qualified distribution if it is made on or after the presidentially-declared disaster date (“applicable declaration date”) and before January 1, 2010 and is made to an individual whose principal residence on the applicable declaration date is located in a Midwestern disaster area and who sustained an economic loss by reason of the disaster. Other principal features include the
following: (i) the waiver is limited to amounts up to $100,000; (ii) the mandatory withholding rules applicable to eligible rollover distributions would not apply; (iii) participants receiving a qualified distribution would be permitted to spread the income tax resulting from receipt of the distribution ratably over three years; and (iv) amounts distributed may be re-contributed to the plan over a three-year period following the distribution and such re-contributed amounts would not be includible in income (e.g., if a participant received a qualified distribution in 2008 and subsequently re-contributed the distribution amount in 2009, the participant may file an amended return requesting a refund for the amount taxable in 2008). The estimated revenue loss of this proposal is $42 million over ten years.

Recontribution of Withdrawals for Home Purchases. The proposal allows distributions for
home purchases that were made from a Code section 401(k) or 403(b) plan or IRA after the date which is 6 months before the applicable declaration date and before the
day after the applicable declaration date and that were not finalized because of the tornadoes and floods giving rise to the designation of the area as a disaster area to be re-contributed to the plan or IRA tax-free (i.e., the re-contributions would be treated as rollovers). Amounts must be recontributed within 5 months from the date of enactment of this bill in order to receive favorable tax treatment. The proposal is estimated to have a negligible revenue effect over ten years. Loans from Qualified Plans. The proposal effectively doubles the limitation on loans from a 401(k), 403(b), or a governmental 457(b) plan by allowing participants located in a Midwestern
disaster area and who sustained economic loss by reason of the tornadoes and floods giving rise to the designation of the area as a disaster area to receive loans up to the lesser of $100,000, or 100 percent of the vested accrued benefit for loans made after the date of enactment and before January 1, 2010. In addition, outstanding loan payments due on or after the applicable declaration date and before January 1, 2010 may be deferred an additional 12 months, with appropriate adjustments for interest. The proposal is estimated to have a negligible revenue effect over ten years.

Suspension of Casualty Loss Limitations. Under present law, non-business casualty losses are deductible by taxpayers who itemize only to the extent they exceed ten percent of adjusted gross income and a one-hundred dollar floor. In some circumstances, taxpayers are permitted to include a current-year casualty loss on an amended prior year return. The proposal eliminates the ten percent and one-hundred dollar floor for casualty losses resulting from the Midwestern disaster and incurred in the disaster area, including those claimed on amended returns. The estimated
revenue loss of this proposal is $61 million over ten years.

Special Look-Back Rule for EIC and Refundable Child Credit. To deal with the situation
where 2008 records are lost or destroyed in a disaster, this proposal allows low-income working families an election to use their 2007 income amount for purposes of determining their eligibility for the refundable earned income credit and the refundable child tax credit. The estimated revenue loss of this proposal is $89 million over ten years.

Additional Personal Exemption for Housing Victims. Current law provides a personal
exemption for taxpayers, their spouses, and dependents. The proposal allows taxpayers who house up to four dislocated persons from the Midwestern disaster for a minimum of sixty days in their principal residences an additional personal exemption of $500 per dislocated person (maximum additional personal exemption increase of $2,000). Family members (other than spouses and dependents) staying with the taxpayer may qualify, and the housing must be provided rent-free. This proposal would not affect any deductions or exemptions for the dislocated person on the dislocated person’s tax return. The deduction can be claimed in 2008 and 2009, but cannot be claimed in both years with respect to the same person. The estimated revenue loss of this proposal is $10 million over ten years.

Exclusion for Certain Cancellations of Indebtedness. Under current law, gross income
generally includes any amount realized from the discharge of indebtedness. The proposal ensures that individuals are not taxed on personal debt that is discharged in response to damage suffered from the Midwestern disaster. For example, if a house is damaged or destroyed and the mortgage lender discharges all or part of this mortgage debt, the amount discharged is not treated as income as a result of the proposal. The estimated revenue loss of this proposal is $6 million over ten years.

Extension of Replacement Period for Property Lost Due to Floods or Tornadoes in the
Midwestern Disaster Zone. Present law allows taxpayers not to recognize gain with respect to homes that are damaged or destroyed as a result of a presidentially-declared disaster if the taxpayer replaces the property within a four-year period. Business property that is destroyed must be replaced within a two-year period to avoid gain recognition. The proposal extends the replacement period to five years for principal residences and business property that was damaged or destroyed within any presidentially-declared disaster area for the Midwestern disaster, and the replacement property must be located in the same county. The estimated revenue loss of this
proposal is $65 million over ten years.

B. RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR INDIVIDUAL ASSISTANCE OR INDIVIDUAL AND PUBLIC ASSISTANCE

The proposals immediately below benefit individuals and businesses located in all counties in the ten states above presidentially-declared (FEMA) major disaster areas determined to warrant individual assistance, or individual and public assistance, due to flooding, tornadoes, or severe storms.

Relief for Individuals and Families Employee Retention Credit. This proposal provides a 40 percent tax credit for wages paid up to $6,000 if paid after the applicable disaster date, and before January 1, 2009, by employers with 200 or fewer employees located in the Midwestern disaster area who continue to pay their employees while their business is inoperable. The estimated revenue loss of this proposal is $93 million over ten years.

Expansion of Hope Scholarship and Lifetime Learning Credit. Current law allows a Hope
Scholarship Credit in the first two years of post-secondary education equal to 100% 13 of the first $1,200 of qualified tuition and related expenses, and 50% of the next $1,200 for a maximum credit of $1,800. There is also a Lifetime Learning Credit available to students enrolled in one or more courses at the undergraduate or graduate level (whether or not pursuing a degree), equal to 20% of the first $10,000 in qualified tuition and related expenses. The proposal doubles the Hope Credit dollar amounts so the maximum credit would be $3,000, and doubles the Lifetime Learning Credit percentage from 20% to 40%, for a maximum Lifetime Learning Credit of $4,000 for students attending undergraduate or graduate institutions in the Midwestern disaster area. Room, board, books and fees would also be considered qualified expenses. This proposal applies to tax years 2008 and 2009. The estimated revenue loss of this proposal is $121 million over ten years.

Secretarial Authority to Adjust Taxpayer and Dependency Status for Taxpayers. The
Midwestern disaster has displaced thousands of individuals. Under present law, a prolonged change in a family’s living situation could affect its eligibility for various tax benefits. The proposal gives the Treasury Department the authority to ensure taxpayers do not lose deductions, credits or filing status because of dislocations from the Midwestern disaster. The proposal is estimated to have a negligible revenue effect over ten years.

Mortgage Revenue Bonds. Section 143(d) requires that 95 percent of net proceeds of mortgage revenue bonds are used to finance residences of mortgagors who had no present ownership interest in their principal residences at any time during the 3-year period ending on the date their mortgage is executed. The proposal permits states to issue tax-exempt bonds to finance low interest loans to taxpayers whose principal residence has been damaged as a result of a disaster. Disaster victims could use these low-interest loans to repair or reconstruct their homes. The provision is effective for qualified disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is included in the estimate below on Tax-exempt Bonds.

Tax Relief for Businesses
Tax-exempt Bonds. Provides Iowa, Arkansas, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin the authority to issue a special class of qualified private activity bonds, called Midwestern disaster area bonds, outside of the state volume caps. The maximum aggregate bond authority with respect to any state cannot exceed $1,000 times the portion of the state population which is located in a Midwestern disaster area. Midwestern disaster area bonds can be issued by States and municipalities. Bond proceeds can be used to pay for acquisition, construction, and renovation of nonresidential real property, qualified low income residential rental housing, and public utility property (e.g., gas, water, electric and telecommunication lines) located in the Midwestern disaster area. The current low-income housing targeting rules are relaxed so that more bond proceeds can be used to rebuild housing in the Midwestern disaster area. Interest payments on the bonds are not subject to the AMT. The authority to issue Midwestern disaster area bonds expires after December 31, 2010. In the case of project involving a private business use, either the person using the property suffered a loss in a trade or business attributable to severe storms, tornadoes or flooding or is a person designated by the Governor of the State as a person carrying on a trade or business replacing a trade or business with respect to
which another person suffered such loss. In the case of a project relating to public utility property, the project must involve the repair or reconstruction of public utility property damaged by severe storms, tornadoes or flooding. The bonds can also be used to provide financing for mortgagors who suffered damages to their principal residences attributable to severe storms, tornadoes or flooding. The total estimated revenue loss of this proposal and the proposal for mortgage revenue bonds is $1.320 billion over ten years.

Low Income Housing. Under current law, States receive allocations of low-income housing tax credits based on population. The proposal allows States to allocate volumes of additional housing credit amounts in years 2008, 2009, 2010 of $8 per person in the Midwestern disaster area measured by population data issued before the earliest applicable disaster date for Midwestern disaster areas within the applicable state. The total estimated revenue loss of this proposal and the proposal for representations regarding income eligibility is $2.203 billion over ten years.

Additional Depreciation. Permits businesses that suffered damages to claim an additional first year depreciation deduction equal to 50 percent of the cost of new real and personal property investments made in the disaster area. The additional deduction applies to purchased computer software, leasehold improvements, certain commercial and residential real estate expenditures and equipment. All depreciation deductions (including bonus depreciation) would be exempt from the AMT. The total estimated revenue loss of this proposal is reflected under the National Disaster Section.

Expensing Property. The proposal would increase by $100,000 (or the cost of qualified
property, if less) the amount of expensing available for qualifying expenditures made in the disaster area through December 31, 2011. This proposal would also increase by $600,000 (or the cost of qualified property, if less) the level of investment at which benefits phase-out, thus allowing more businesses to use this tax benefit in rebuilding. The total estimated revenue loss of this proposal is reflected under the National Disaster Section.

Expensing Demolition and Clean-up Costs. Under the proposal, 50 percent of the costs (that would otherwise be capitalized) related to site cleanup and demolition would be deductible by businesses. Effective for amounts paid or incurred beginning on the applicable disaster date and ending on December 31, 2010. The estimated revenue loss of this proposal is $3 million over ten years.

Expensing Environmental Remediation Costs. The proposal extends the deductibility of costs of cleaning up a qualified contamination site, if the release (or threat of release) or disposal of a hazardous substance is attributable to the disaster described in the Presidential declaration in the Midwestern disaster area. Effective for expenditures paid or incurred beginning on the applicable disaster date and ending on December 31, 2010. The estimated revenue loss of this proposal is less than $500,000 over ten years.

Increase in Rehabilitation Credit. For buildings that were damaged or destroyed in an
applicable disaster, the rehabilitation credit is raised from 10 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure, and the rehabilitation credit is raised from 20 percent to 26 percent of qualified expenditures for any certified historic structure. The estimated revenue loss of this proposal is $3 million over ten years.

Five-year Net Operating Loss Carryback for Certain Amounts. The proposal extends the net operating loss carryback period from 2 to 5 years for net operating losses attributable to (i) new investment and repairing existing investment in the areas damaged by the Midwestern disaster; (ii) business casualty losses caused by the Midwestern disaster; and (iii) moving expenses and temporary housing expenses for employees working in areas damaged by the Midwestern disaster. The proposal is effective on the date of enactment. The estimated revenue loss of this proposal is $37 million over ten years.

Tax Credit Bonds. Authorizes Midwestern disaster States to issue debt service tax credit bonds providing credits against Federal income tax instead of interest payments, so that these States can provide assistance to communities unable to meet their debt service requirements as a result of the flooding, tornadoes, and severe storms. The maturity of the bonds cannot exceed 2 years. At least 95 percent of bond proceeds must be used to redeem or to pay principal, interest or premiums on an outstanding bond, and such proceeds so used must be matched by an equal amount of State funds. The maximum amount of tax credit bonds shall not exceed $100 million
for any state with an aggregate population located in the Midwestern disaster areas within such state of at least 2 million; $50 million for states with such populations of at least 1 million but less than 2 million; and zero for any other state. The estimated revenue loss of this proposal is $152 million over ten years.

Tax Incentives for Charitable Giving
Temporary Suspension of Limitations on Charitable Contributions. The amount allowed as a charitable deduction in any taxable year may not exceed ten percent of the corporation’s taxable income or fifty percent of an individual’s adjusted gross income. The proposal temporarily waives these limits regarding charitable cash contributions dedicated to Midwestern disaster relief efforts. The proposal is effective for contributions paid during the period beginning on the earliest
applicable disaster date for all States and ending on December 31, 2008. The estimated revenue loss of this proposal is $433 million over ten years.

Increase in Standard Mileage Rate for Charitable Use of Vehicles. The mileage rate
individuals may use to compute a tax deduction for personal vehicle expenses associated with charitable work is statutory and has not been increased since 1997 and is currently at 14 cents per mile. For a taxpayer assisting in relief efforts related to the Midwestern disaster, the proposal sets the charitable mileage rate at seventy percent of the current standard business mileage rate, beginning on the applicable disaster date and ending on December 31, 2008. The estimated revenue loss of this proposal is $9 million over ten years.

Exclusion from Income of Mileage Reimbursements for Charitable Volunteers. In general,
reimbursements received for operating expenses of a personal vehicle used in connection with charitable work in excess of the statutory charitable mileage rate are taxable income to the recipient. However, reimbursements for charitable mileage attributable to the Midwestern disaster up to the amount of the standard business mileage rate will not be considered taxable income through December 31, 2008. The estimated revenue loss of this proposal is $1 million over ten years.

Tax Benefits Not Available with Respect to Certain Property. The proposals relating to
additional first-year depreciation, increased expensing, and the five-year carryback of NOLs do not apply with respect to certain property. Specifically, as was done in the tax relief package for the Katrina disaster, the tax relief provisions do not apply with respect to golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, or liquor stores. The proposals also do not apply with respect to any property used directly in connection with gambling, animal racing, or the on-site viewing of such racing, and with respect to buildings or portions of buildings dedicated to such activities (except if the portion so dedicated is less than 100 square feet).

HURRICANE IKE DISASTER TAX RELIEF
Low Income Housing. Under current law, States receive allocations of low-income housing tax credits based on population. The proposal allows Texas and Louisiana to allocate volumes of additional housing credit amounts in years 2008, 2009, 2010 of $16 per person based on the populations of Brazoria, Chambers, Galveston, Jefferson and Orange counties in Texas and Calcasieu and Cameron parishes in Louisiana. The total estimated revenue loss of this proposal in included in the Tax-exempt Bonds proposal immediately below.

Tax-exempt Bonds. Provides Texas and Louisiana the authority to issue a special class of qualified private activity bonds outside of the state volume caps. The maximum aggregate bond authority with respect to any state cannot exceed $2,000 times the portion of the population of Brazoria, Chambers, Galveston, Jefferson and Orange counties in Texas and Calcasieu and Cameron parishes in Louisiana. The bonds can be issued by States and municipalities, but must be allocated to areas based in the order in which relief is most needed. Bond proceeds can be used to pay for acquisition, construction, and renovation of nonresidential real property, qualified low income residential rental housing, and public utility property (e.g., gas, water, electric and
telecommunication lines) located in the Hurricane Ike disaster area. The current low-income housing targeting rules are relaxed so that more bond proceeds can be used to rebuild housing in the Hurricane Ike disaster area. Interest payments on the bonds are not subject to the AMT. The authority to issue the bonds expires after December 31, 2010. In the case of project involving a private business use, either the person using the property suffered a loss in a trade or business attributable to severe storms, tornadoes or flooding or is a person designated by the Governor of the State as a person carrying on a trade or business replacing a trade or business with respect to which another person suffered such loss. In the case of a project relating to public utility property, the project must involve the repair or reconstruction of public utility property damaged by severe storms, tornadoes or flooding. The total estimated revenue loss of this proposal and the Low Income Housing proposal immediately above is $638 million over ten years.

NATIONAL DISASTER RELIEF
The proposal provides tax relief for victims of all Federally-declared disasters occurring after December 31, 2007 and before January 1, 2010. The same limitations with respect to certain property apply to this relief.

Individual Loss Provision. Individual casualty losses are itemized deductions to the extent they exceed $100 per casualty floor and 10 percent of AGI under section 165(h)(1) and (2). The proposal reforms casualty loss rules to allow more disaster victims to claim individual property losses. Under current law, taxpayers can only claim a loss that exceeds $100 and 10 percent of the taxpayer’s adjusted gross income. This bill would waive the restrictive 10 percent rule, raise the $100 floor to $500, and allow non-itemizers to use these losses as a standard deduction. The provision is effective for qualified disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is estimated to cost $934 million over ten years.

Qualified Disaster Expenses. Environment remediation expenditures incurred after December 31, 2007 are capitalized (expired section 198 allowed current expensing). Demolition costs of buildings are capitalized under section 280B. Debris removal and repairs costs are either currently expensed or capitalized depending on a facts and circumstances test under section 263(a). The proposal allows disaster victims to write off and immediately recover demolition, deductible clean up and repair (regardless of whether costs are incurred due to a casualty event), and environmental remediation expenses. The provision is effective for qualified disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is estimated to cost $32 million over ten years.

Treatment of Net Operating Losses Attributable to Qualified Disaster Casualty Expenses.
Net operating losses may be carried back two years under section 172(b)(1). The proposal extends from two to five years the time period taxpayers can claim casualty losses or qualified disaster expenses. When taxpayers carry losses back to prior years, they receive a refund of the taxes that they paid in the earlier year. This prompt refund can help them reinvest in their businesses or make ends meet in the aftermath of a disaster. The provision is effective for qualified disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is estimated to cost $162 million over ten years.

Mortgage Revenue Bonds. Section 143(d) requires that 95 percent of net proceeds of mortgage revenue bonds are used to finance residences of mortgagors who had no present ownership interest in their principal residences at any time during the 3-year period ending on the date their mortgage is executed. The proposal permits states to issue tax-exempt bonds to finance low interest loans to taxpayers whose principal residence has been damaged as a result of a disaster. Disaster victims could use these low-interest loans to repair or reconstruct their homes. The provision is effective for qualified disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is estimated to cost $45 million over ten years. Additional Depreciation. Permits businesses that suffered damage as a result of the Presidentially-declared disasters to claim an additional first-year depreciation deduction equal to 50 percent of the cost of new real and personal property investments made in the Presidentially declared disaster area. The additional deduction applies to purchased computer software, leasehold improvements, certain commercial and residential real estate expenditures and equipment. All depreciation deductions (including bonus depreciation) would be exempt from the AMT. The proposal applies to property placed in service through December 31, 2011 (December 31, 2012 for real property). The total estimated revenue loss of this proposal is $2.3 billion over ten years.

Expensing Property. The proposal would increase by $100,000 (or the cost of qualified
property, if less) the amount of expensing available for qualifying expenditures made in the disaster area through December 31, 2011. This proposal would also increase by $600,000 (or the cost of qualified property, if less) the level of investment at which benefits phase-out, thus allowing more businesses to use this tax benefit in rebuilding. The provision is effective for qualified disasters occurring after December 31, 2007 and before January 1, 2010. The estimated revenue loss of this proposal is $10 million over ten years.

REVENUE PROPOSALS
Current Inclusion of Deferred Compensation Paid by Certain Tax Indifferent Parties. The
bill would tax individuals on a current basis if such individuals receive deferred compensation from a tax indifferent party. Current law generally allows executives and other employees to defer paying tax on compensation until the compensation is paid. This deferral is made possible by rules that require the corporation paying the deferred compensation to defer the deduction that relates to this compensation until the compensation is paid. Matching the timing of the deduction with the income inclusion ensures that the executive is not able to achieve the tax benefits of
deferred compensation at the expense of the Treasury. Instead, the corporation paying the compensation bears the expense of paying deferred compensation as a result of the deferred deduction. Where an individual is paid deferred compensation by a tax indifferent party (such as an offshore corporation in a low or no-tax jurisdiction), there is no offsetting deduction that can be deferred. As a result, individuals receiving deferred compensation from a tax indifferent party are able to achieve the tax benefits of deferred compensation at the expense of the Treasury. The proposal is effective for services performed after December 31, 2008. This proposal is estimated to raise $25.161 billion over ten years.

The Energy Improvement and Extension Act of 2008

I. RENEWABLE ENERGY INCENTIVES
Extension and Modification of Production Tax Credit. The bill extends the placed in-service date for the Section 45 credit through December 31, 2009 in the case of wind and refined coal, and through December 31, 2010 in the case of other sources. The bill expands the types of facilities qualifying for the credit to new biomass facilities and to those that generate electricity from marine renewables (e.g., waves and tides). The bill updates the definition of an open-loop biomass facility, the definition of a trash combustion facility, and the definition of a nonhydroelectric
dam. The bill also increases emissions standards on the refined coal credit and removes its market value test. The estimated cost of this proposal is $5.817 billion over 10 years.

Long-term Extension of Energy Credit. The bill extends the 30% investment tax credit for solar energy property and qualified fuel cell property, as well as the 10% investment tax credit for microturbines, through 2016. The bill increases the $500 per half kilowatt of capacity cap for qualified fuel cells to $1,500 per half kilowatt of capacity, and adds small commercial wind as a category of qualified investment. The bill also provides a new 10% investment tax credit for combined heat and power systems and geothermal heat pumps. The bill allows these credits to be used to offset the alternative minimum tax (AMT). The estimated cost of this proposal is $1.942 billion over 10 years.

Long-term Extension and Modification of the Residential Energy-Efficient Property Credit. The bill extends the credit for residential solar property for eight through 2016, and removes the credit cap (currently $2,000) for solar electric investments. The bill adds residential small wind investment, capped at $4,000, and geothermal heat pumps, capped at $2,000, as qualifying property. The bill allows the credit to be used to offset the AMT. The estimated cost of this proposal is $1.294 billion over 10 years.
Sales of Electric Transmission Property. The bill extends the present-law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies. Rather than recognizing the full amount of gain in the year of sale, this provision allows gain on such sales to be recognized ratably over an 8-year period. The rule applies to sales before January 1,
2010. This proposal is estimated to be revenue-neutral over 10 years.

New Clean Renewable Energy Bonds (“CREBs”). The bill authorizes $800 million of new
clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, qualified hydropower, landfill gas, marine renewable and trash combustion facilities. This $800 million authorization is subdivided into thirds: 1/3 for qualifying projects of State/local/tribal governments; 1/3 for qualifying projects of public power providers; and 1/3 for qualifying projects of electric cooperatives. The bill also extends the termination date for existing CREBs by one year. The estimated cost of this proposal is $267 million over 10 years.

II. CARBON MITIGATION AND COAL
Carbon Capture and Sequestration (CCS) Demonstration Projects. The bill provides $1.5
billion in new tax credits for the creation of advanced coal electricity projects (Section 48A) and certain coal gasification projects (Section 48B) that demonstrate the greatest potential for carbon capture and sequestration (CCS) technology. Of these $1.5 billion of incentives, $1.25 billion will be awarded to advanced coal electricity projects, and $250 million will be awarded to coal gasification projects. These tax credits will be awarded by Treasury through an application process, with applicants that demonstrate the greatest CO2 sequestration percentage receiving the highest priority. Applications will not be considered unless they can demonstrate that either their advanced coal electricity project would capture and sequester at least 65% of the facility’s CO2 emissions or that their coal gasification project would capture and sequester at least 75% of the facility’s CO2 emissions. Once these credits are awarded, recipients failing to meet these minimum levels of carbon capture and sequestration would forfeit these tax credits. The bill also clarifies that gasification projects producing transportation grade liquid fuels are eligible under
Section 48B. The estimated cost of this proposal is $1.424 billion over 10 years.
Solvency for the Black Lung Disability Trust Fund. The bill would enact the President’s FY 2009 proposal to bring the Black Lung Disability Trust Fund out of debt. Under current law, an excise tax is imposed on coal at a rate of $1.10 per ton for coal from underground mines and $0.55 per ton for coal from surface mines (the aggregate tax per ton capped at 4.4% of the amount sold by the producer). Receipts from this tax are deposited in the Black Lung Disability Trust Fund, which is used to pay compensation, medical and survivor benefits to eligible miners and survivors and to cover costs of program administration. The Trust Fund is permitted to borrow from the General Fund any amounts necessary to make authorized expenditures if excise tax
receipts do not provide sufficient funding. Reduced rates of excise tax apply after the earlier of December 31, 2013 or the date on which the Black Lung Disability Trust Fund has repaid, with interest, all amounts borrowed from the general fund of the Treasury. The President’s Budget proposes that the current excise tax rate should continue to apply beyond 2013 until all amounts borrowed from the general fund of the Treasury have been repaid with interest. After repayment, the reduced excise tax rates of $0.50 per ton for coal from underground mines and $0.25 per ton for coal from surface mines would apply (aggregate tax per ton capped at 2 percent of the amount
sold by the producer). The bill also includes the President’s proposal to restructure Black Lung Trust Fund debt. The proposal is estimated to raise $1.287 billion over 10 years.

CO2 Capture Credit. The bill provides a $10 credit per ton for the first 75 million metric tons of CO2 captured and transported from an industrial source for use in enhanced oil recovery and $20 credit per ton for CO2 captured and transported from an industrial source for permanent storage in a geologic formation. Qualifying facilities must capture at least 500,000 metric tons of CO2 per year. The credit applies to CO2 stored or used in the United States. The estimated cost of this proposal is $1.119 billion over ten years.

Refund of Coal Excise Taxes Unconstitutionally Collected from Exporters. The Courts have determined that the Export Clause of the Constitution prevents the imposition of the coal excise tax on exported coal and, therefore, taxes collected on such exported coal are subject to a claim for refund. The bill creates a new procedure under which certain coal producers and exporters may claim a refund of these excise taxes that were imposed on coal exported from the U.S. Under this procedure, coal producers or exporters that exported coal during the period beginning on or after 1/1/90 and ending on or before the date of enactment of the bill, may obtain a refund from Treasury of excise taxes paid on such exported coal and any interest accrued from date of overpayment. The estimated cost is $199 million over 10 years.

Steel Industry Fuel. The bill adds a credit for coal used in the manufacture of coke, a feedstock used in steel production. The credit amount is $2 per barrel-equivalent of oil, available for facilities that place in service before January 1, 2010. The estimated cost of this proposal is $61 million over 10 years.

Carbon Audit of the Tax Code. The bill directs Treasury to request that the National Academy of Sciences undertake a comprehensive review of the tax code to identify tax provisions with the largest effect on carbon and other greenhouse gas emissions, and to estimate the magnitude of those effects. This proposal has no revenue effect.

III. TRANSPORTATION & DOMESTIC FUEL SECURITY
Plug-in Electric Drive Vehicle Credit. The bill establishes a new credit for plug-in electric drive vehicles. The credit for passenger vehicles and light trucks ranges from $2500 to $7500. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the total number of qualified plug-in electric drive vehicles sold in the U.S. exceeds 250,000. The credit is available against the alternative minimum tax (AMT). The estimated cost of this proposal is $758 million over 10 years.

Incentives for Idling Reduction Units and Advanced Insulation for Heavy Trucks. The bill provides an exemption from the heavy vehicle excise tax for the cost of idling reduction units, such as auxiliary power units (APUs), which are designed to eliminate the need for truck engine idling (e.g., to provide heating, air conditioning, or electricity) at vehicle rest stops or other temporary parking locations. The bill also exempts the installation of advanced insulation, which can reduce the need for energy consumption by transportation vehicles carrying refrigerated cargo. Both exemptions are intended to reduce carbon emissions in the transportation sector. The estimated cost of this proposal is $95 million over 10 years.

Bicycle Commuters. The bill allows employers to provide employees who commute to work by bicycle limited fringe benefits to offset the costs of such commuting (e.g., storage). The estimated cost of this proposal is $10 million over 10 years.

Expansion of Allowance for Cellulosic Biofuels Property. Taxpayers are allowed to
immediately write off 50% of the cost of facilities that produce cellulosic biofuels ethanol if such facilities are placed in service before January 1, 2013. The bill makes this benefit available for the production of other cellulosic biofuels in addition to cellulosic ethanol. This proposal is estimated to be revenue neutral over 10 years.

Extension of Biodiesel Production Tax Credit; Extension and Modification of Renewable
Diesel Tax Credit. The bill extends the $1.00 per gallon production tax credit for biodiesel and the 10¢/gallon credit for small biodiesel producers through 2009. The bill also extends the $1.00 per gallon production tax credit for diesel fuel created from biomass. The bill eliminates the current-law disparity in credit for biodiesel and agri-biodiesel, and eliminates the requirement that renewable diesel fuel must be produced using a thermal depolymerization process. As a result, the credit will be available for any diesel fuel created from biomass without regard to the process used, so long as the fuel is usable as home heating oil, as a fuel in vehicles, or as aviation jet fuel.

Diesel fuel created by co-processing biomass with other feedstocks (e.g., petroleum) will be eligible for the 50¢/gallon tax credit for alternative fuels. Biodiesel imported and sold for export will not be eligible for the credit effective May 15, 2008. The estimated cost of this proposal is $451 million over 10 years.

Extension and Modification of Alternative Fuels Credit. The bill extends the alternative fuel excise tax credit under Section 6426 through December 31, 2009 for all fuels except hydrogen (which maintains its current-law expiration date of September 30, 2014). Beginning 10/1/09, qualified fuel derived from coal through the Fischer-Tropsch process must be produced at a facility that separates and sequesters at least 50% of its CO2 emissions. This sequestration requirement increases to 75% on 12/31/09. The proposal further provides that biomass gas versions of liquefied petroleum gas and liquefied or compressed natural gas, and aviation fuels qualify for the credit. The estimated cost of this proposal is $61 million over 10 years.

Extension and Expansion of the Alternative Refueling Stations Credit. The bill extends the 30% credit for alternative refueling property, such as natural gas or E85 pumps, through 2010. The bill also adds electric vehicle recharging property to the types of property eligible for the credit. The credit for hydrogen refueling property is unchanged. The estimated cost of this proposal is $87 million over 10 years.

Publicly Traded Partnership Income Treatment of Alternative Fuels. The proposal permits publicly traded partnerships to treat income derived from
the transportation, or storage of certain alternative fuels, as well as anthropogenic CO2, as qualifying income for purposes of the publicly traded partnership rules. The estimated cost of this proposal is $119 million over 10 years.

Percentage Depletion for Marginal Wells. The proposal extends for 2009 the suspension on the taxable income limit for purposes of depreciating a marginal oil or gas well. The estimated cost of this proposal is $124 million over 10 years.

Refinery Expensing. The Energy Policy Act of 2005 established a temporary expensing
provision for refinery property which increases total capacity by 5% or which processes
nonconventional feedstocks at a rate equal or greater to 25% of the total throughput of the refinery. This bill extends both the refinery expensing contract requirement and the placed-inservice requirement for this expensing provision for two years. The bill also qualifies refineries directly processing shale or tar sands for this provision. The estimated cost of this proposal is $894 million over 10 years.

IV. ENERGY CONSERVATION AND EFFICIENCY
Qualified Energy Conservation Bonds. The bill creates a new category of tax credit bonds to finance State and local government initiatives designed to reduce greenhouse emissions. There is a national limitation of $800 million, allocated to States, municipalities and tribal governments. The estimated cost of this proposal is $276 million over 10 years.

Extension and Modification of Credit for Energy-Efficiency Improvements to Existing
Homes. The bill extends the tax credit for energy-efficient existing homes for 2009, and includes energy-efficient biomass fuel stoves as a new class of energy efficient property eligible for a consumer tax credit of $300. The proposal also clarifies the efficiency standard for water heaters. The estimated cost of this proposal is $827 million over 10 years.

Extension of Energy-Efficient Buildings Deduction. Current law allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. The amount deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50% energy savings target. The energy savings must be accomplished through energy and power cost reductions for the building’s heating, cooling, ventilation, hot water, and interior lighting systems. This bill extends the energy efficient commercial buildings deduction for five years, through December 31, 2013. The estimated cost of this proposal is $891 million over 10 years.

Extension of Credit for Energy-Efficiency Improvements to New Homes. Under current law,
contractors receive a credit for the construction of energy-efficient new homes that achieve a 30% or 50% reduction in heating and cooling energy consumption relative to a comparable dwelling. The credit equals $1,000 for homes meeting a 30% efficiency standard, $2,000 for homes meeting a 50% standard. The bill extends the new energy efficient home tax credit through 2009. The estimated cost of this proposal is $61 million over 10 years.

Modification and Extension of Energy-Efficient Appliance Credit. Manufacturers receive a tax credit for the production of energy-efficient dishwashers, clothes washers and refrigerators. Credit is provided only for appliances that are U.S.-produced. The bill increases the credit’s standards and amounts, and extends the credit for appliances manufactured through 2010. The estimated cost of this proposal is $322 million over 10 years.

Accelerated Depreciation for Smart Meters and Smart Grid Systems. The bill provides
accelerated depreciation for smart electric meters and smart electric grid equipment. Under current law, taxpayers are generally able to recover the cost of this property over a 20-year period. The bill allows taxpayers to recover the cost of this property over a 10-year period, unless the property already qualifies under a shorter recovery schedule. The estimated cost of this proposal is $915 million over 10 years.

Extension and Modification of Qualified Green Building and Sustainable Design Project
Bond. The bill extends the authority to issue qualified green building and sustainable design project bonds through the end of 2012. The bill also clarifies the application of the reserve account rules to multiple bond issuances. The estimated cost of this proposal is $45 million over 10 years.

Investments in Recycling. The bill allows taxpayers to claim accelerated depreciation for purchase of equipment used to collect, distribute or recycle a variety of commodities. The estimated cost of this proposal is $162 million over 10 years.

V. REVENUE PROVISIONS
Modification to Section 199. Section 199 provides a deduction – currently 6% - equal to a portion of the taxpayer’s qualified production activities income. The Section 199 deduction is scheduled to increase to 9% in 2010. This bill would freeze the Section 199 deduction at 6% for gross receipts derived from the sale, exchange or other disposition of oil, natural gas, or any primary product thereof. This proposal is estimated to raise $4.906 billion over 10 years.

Basis Reporting by Brokers on Sales of Stock. This provision creates mandatory basis
reporting measures to the IRS by brokers for transactions involving publicly traded securities, such as stock, debt, commodities, derivatives and other items as specified by Treasury. The proposal is estimated to raise $6.67 billion over 10 years.

FUTA Surtax. The Federal Unemployment Tax Act ("FUTA") imposes a 6.2 percent gross tax
rate on the first $7,000 paid annually by covered employers to each employee. In 1976, Congress passed a temporary surtax of 0.2 percent of taxable wages to be added to the permanent FUTA tax rate. The temporary surtax subsequently has been extended through 2008. The President's FY 2009 Budget proposes extending the FUTA surtax. The Treasury Department states that "extending the surtax will support the continued solvency of the Federal unemployment trust funds and maintain the ability of the unemployment system to adjust to any economic downturns." The bill would enact the President's proposal for one year (through 2009). This proposal is estimated to raise $1.474 billion over 10 years.

Modification of Section 907. The proposal eliminates the distinction between foreign oil and gas extraction income (“FOGEI”) and foreign oil related income (“FORI”). FOGEI relates to upstream production to the point the oil leaves the wellhead. FORI is defined as all downstream processes once the oil leaves the wellhead (i.e. transportation, refining). Currently, FOGEI and FORI have separate foreign tax credit limitations. This proposal combines FOGEI and FORI into one foreign oil basket, and applies the existing FOGEI limitation. This proposal is estimated to raise $2.23 billion over ten years.

Oil Spill Liability Trust Fund. The proposal extends the oil spill tax through December 31, 2017, increases the per barrel tax from 5 cents to 8 cents from 2009 though 2016, and to 9 cents in 2017. The bill also repeals the requirement that the tax be suspended when the unobligated balance exceeds $2.7 billion. This proposal is estimated to raise $1.715 billion over 10 years.
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